The Bank of Japan's interest rate hike expectations are targeted by tariffs! Rising rice prices accelerate inflation, but the economic outlook is overshadowed

According to the Zhitong Finance APP, consumer inflation in Japan rose last month, partly due to a significant increase in rice prices. This trend was originally expected to strengthen the central bank's gradual interest rate hike stance, but U.S. tariff policies have cast a shadow over the economic outlook, making the direction of monetary policy more complex.

Data released by Japan's Ministry of Internal Affairs and Communications on Friday showed that the core CPI excluding fresh food rose 3.2% year-on-year in March, an increase from February's 3%, in line with economists' expectations. Further excluding energy prices, the core-core CPI rose 2.9% year-on-year, consistent with expectations, marking the fastest growth since March of last year.

This data is expected to bolster the confidence of Bank of Japan officials in their interest rate hike policy—Japan's overall inflation level has remained above the 2% target for nearly three years. Bank of Japan Governor Kazuo Ueda has repeatedly emphasized that interest rates will be adjusted based on price trends, while also stating the need to closely monitor the evolution of U.S. tariff policies.

Although government utility subsidies have somewhat suppressed inflation, prices are still rising at an accelerated pace. Service prices rose 1.4% year-on-year, slightly up from February's 1.3% increase, remaining consistent with January's growth. Food prices rose 7.4% year-on-year, slightly lower than the previous month's 7.6%. The price of Japan's staple rice surged 92.1% year-on-year, the fastest increase since records began in 1971.

Taro Saito, head of economic research at NLI Research Institute, stated: "Food inflation is the main driver of overall inflation. Import prices have not risen significantly, but food inflation remains high. This indicates that companies are willing to raise prices, and in some cases, they are increasing prices more than the rise in costs. From the perspective of the Bank of Japan, inflation expectations are changing."

After experiencing more than a decade of deflation, price increases are still at a high level by Japanese standards. The soaring rice prices have put pressure on Prime Minister Shigeru Ishiba—NHK polls show his approval rating has fallen to a new low since taking office. Government and central bank data indicate that consumer confidence has dropped to a two-year low, while household inflation expectations continue to rise.

Taro Kimura, an economist at Bloomberg Economics, stated: "On one hand, high inflation demands a reduction in stimulus; on the other hand, U.S. tariff threats to economic growth. We expect the central bank to hold steady until July before raising interest rates again."

Latest data shows that Japan's inflation rate remains the fastest among the G7 economies and is the only G7 country facing tariff pressures while experiencing rising inflation. Reports indicate that, aside from tariffs, rising living costs have sparked discussions among lawmakers about cash payments or tax rebates ahead of the elections that may be held in July. Ishiba may find it more difficult to refuse these demands as he tries to garner support for his minority government Analysts expect that due to labor shortages, rising raw material costs, and the continued weakness of the yen, the pressure on companies to pass on costs will continue to drive up inflation levels in the coming months.

Keiichi Iguchi, a senior strategist at Resona Holdings, stated: "Considering the tariff factors, the possibility of the central bank raising interest rates has significantly decreased. Even if the CPI is strong, the yen is unlikely to strengthen."

According to a survey by Japanese market research firm Teikoku Databank, the number of food price increases in April will exceed 4,000 for the first time in 18 months.

Saito from NLI stated: "The data confirms that Japan's inflation was fully in line with the central bank's expectations before the U.S. tariffs. However, tariffs will undoubtedly weigh on the economy, and the originally planned semi-annual interest rate hike pace may need to be adjusted."